PAYE vs Self Assessment: Which Do You Need in the UK?

Most UK limited company directors need both PAYE and Self Assessment. PAYE handles the tax on your salary automatically through payroll. Self Assessment handles everything else: dividends, rental income, investment gains, and any tax adjustments HMRC cannot make through your tax code. If you take even a single pound of dividends from your company, you must file a Self Assessment tax return. The only directors who can avoid Self Assessment entirely are those drawing salary only, under £100,000, with no other untaxed income.

This guide explains both systems in full, how they interact, when you need one or both, and what happens when you get it wrong. Every threshold, deadline, and penalty figure is current for the 2025/26 tax year (6 April 2025 to 5 April 2026).

What Is PAYE and How Does It Work?

PAYE stands for Pay As You Earn. It is the system HMRC uses to collect Income Tax and National Insurance Contributions (NICs) from employment income before the money reaches the employee. Your employer (or your own company, if you are a director) deducts tax and NICs from each pay period and sends them to HMRC on your behalf.

The PAYE system was introduced in 1944 and remains the primary mechanism for collecting tax from the UK's 30+ million employees. It operates in real time: every time payroll runs, tax is calculated on that payment, deducted, and reported to HMRC through Real Time Information (RTI) submissions.

How PAYE Collects Tax

When your company pays you a salary, the payroll process works as follows:

1. Gross pay is calculated for the period (weekly, monthly, or annually for directors)
2. Your tax code is applied to determine the tax-free portion
3. Income Tax is calculated on the taxable amount using the applicable rates
4. Employee NICs are calculated (Class 1 primary contributions)
5. Employer NICs are calculated (Class 1 secondary contributions)
6. Net pay is issued after deducting employee tax and NICs
7. An RTI submission (FPS) is sent to HMRC on or before payday
8. HMRC is paid the combined tax, employee NICs, and employer NICs by the 22nd of the following month (or 19th for postal payments)

For most employees, PAYE collects exactly the right amount of tax over the year. No further action is required. This is why employed individuals with a single job and no other income generally do not need to file a tax return.

PAYE Tax Rates for 2025/26

Band	Taxable Income	Rate
Personal Allowance	£0 to £12,570	0%
Basic Rate	£12,571 to £50,270	20%
Higher Rate	£50,271 to £125,140	40%
Additional Rate	Over £125,140	45%

The Personal Allowance is reduced by £1 for every £2 earned above £100,000. This creates an effective 60% marginal tax rate between £100,000 and £125,140.

Who Operates PAYE?

Any organisation that pays employees must register as an employer with HMRC and operate PAYE. This includes:

• Companies paying directors a salary
• Sole traders employing staff
• Charities with paid workers
• Individuals employing nannies, carers, or domestic staff

As a limited company director, your company is the employer and you are the employee. Even if you are the sole director and only person on the payroll, you must operate PAYE if your salary exceeds the Lower Earnings Limit (£6,396 per year in 2025/26). In practice, the registration threshold is £123 per week or £533 per month. For a deeper breakdown of running payroll as a director, see our PAYE for Directors guide.

What Is Self Assessment and How Does It Work?

Self Assessment is the system HMRC uses to collect tax on income that is not taxed at source through PAYE. You calculate your own tax liability, report all relevant income on a tax return (form SA100), and pay what you owe directly to HMRC.

Self Assessment is not an alternative to PAYE. It is a parallel system. Many people operate under both simultaneously. Your PAYE salary is reported on the tax return, and the tax already collected through PAYE is credited against your total liability. You then pay the difference (or receive a refund if too much was collected).

What Income Goes Through Self Assessment?

Income Type	Taxed via PAYE?	Reported on SA?
Employment salary	Yes	Yes (but tax already paid)
Company dividends	No	Yes
Rental income	No	Yes
Interest above savings allowance	No	Yes
Capital gains above annual exemption	No	Yes
Foreign income	No	Yes
Freelance/sole trader income	No	Yes
Pension income (some schemes)	Sometimes	Depends on scheme

The Self Assessment Process

1. Register with HMRC for Self Assessment (if not already registered)
2. Receive your Unique Taxpayer Reference (UTR) by post within 10 working days
3. Keep records of all income and expenses throughout the tax year
4. File your tax return (SA100) by the deadline (31 October paper, 31 January online)
5. Pay any tax owed by 31 January
6. Make payments on account if required (by 31 January and 31 July)

For limited company directors, the most common reason for filing Self Assessment is dividends. Dividends are paid out of post-Corporation Tax profits and are not subject to PAYE. They must be declared on your personal tax return, and any tax due is paid through Self Assessment. Our Self Assessment for Directors guide covers this process in detail.

Who Must File a Self Assessment Tax Return?

HMRC requires you to file a Self Assessment tax return if any of the following apply:

• You were self-employed and earned more than £1,000 (before the trading allowance)
• You were a partner in a business partnership
• You had total income above £150,000 (from 2023/24; previously £100,000)
• You had income from savings, investments, or property above certain thresholds
• You received dividends above the £500 dividend allowance (2025/26)
• You or your partner received Child Benefit and your income was above £60,000
• You had income from abroad that needs to be declared
• You owe Capital Gains Tax on asset disposals above the £3,000 annual exempt amount
• You were a company director (and certain conditions are met)
• You received a P800 showing underpaid tax and chose to pay through Self Assessment
• HMRC has sent you a notice to file (SA316)

The Director Exception

Being a company director does not automatically require Self Assessment. The trigger is typically dividends. If you draw no dividends, have salary under £100,000, no other untaxed income, and HMRC has not sent you a notice to file, you may not technically need to file. However, in practice, the vast majority of directors take dividends and therefore must file.

HMRC can also issue a notice to file (SA316) to any director at any time. Once you receive this notice, you must file a return even if you have no additional tax to pay. Failing to file after receiving a notice triggers automatic penalties.

How Do PAYE and Self Assessment Interact for Directors?

This is where many directors get confused. The two systems are not separate silos. They work together to ensure the correct total tax is paid across all income sources.

The Interaction in Practice

Suppose you are a director taking a salary of £12,570 (the personal allowance) and dividends of £40,000 in the 2025/26 tax year.

Through PAYE:

• Your salary of £12,570 is processed through payroll
• Your tax code (likely 1257L) means £12,570 is tax-free
• Income Tax deducted: £0
• Employee NICs: £0 (salary is below the Primary Threshold of £12,570)
• Employer NICs: calculated by the company on earnings above the Secondary Threshold

Through Self Assessment:

• You report total income: £12,570 salary + £40,000 dividends = £52,570
• Tax on salary: £0 (covered by personal allowance via PAYE)
• Tax on dividends: First £500 at 0% (dividend allowance), next £37,200 at 8.75% (basic rate), remaining £2,300 at 33.75% (higher rate)
• Dividend tax = £0 + £3,255 + £776.25 = £4,031.25
• Less PAYE already deducted: £0
• Self Assessment liability: £4,031.25

This is paid by 31 January 2027 (the January after the tax year ends). If the liability exceeds £1,000 and more than 80% was not collected through PAYE, payments on account are also required.

When PAYE Adjusts for Self Assessment

HMRC sometimes adjusts your PAYE tax code to collect tax owed from the previous year's Self Assessment. This is called "coding out" and happens when:

• You owe less than £3,000 from Self Assessment
• You file your return by 30 December (online)
• HMRC considers it appropriate to collect through your code

For example, if your 2024/25 Self Assessment showed you owed £2,400, HMRC might change your 2025/26 tax code to collect an extra £200 per month through PAYE. Your tax code would include a "K" prefix or a reduced allowance. This is convenient but can cause confusion when you see unexpected deductions on your payslip.

Understanding Tax Codes

Tax codes are the mechanism PAYE uses to determine how much tax to deduct from each payment. They consist of a number (representing your tax-free allowance) and a letter (indicating your circumstances).

Common Tax Codes Explained

Code	Meaning	Who Gets It
1257L	Standard personal allowance of £12,570	Most employees with one job
BR	Basic rate (20%) on all earnings, no allowance	Second job or pension
D0	Higher rate (40%) on all earnings	Second job in higher rate band
D1	Additional rate (45%) on all earnings	Second income in additional rate
K followed by a number	Allowance has been used up, tax is owed	HMRC coding out underpaid tax
NT	No tax to deduct	Specific HMRC instruction
0T	No personal allowance applied	Starter without P45, or multiple issues
S prefix (e.g. S1257L)	Scottish tax rates apply	Scottish taxpayers
C prefix (e.g. C1257L)	Welsh tax rates apply	Welsh taxpayers
W1 or M1 suffix	Emergency/week 1/month 1 basis	Temporary code, not cumulative

Emergency Tax Codes

If you start a new directorship without providing a P45 from a previous employer, your company must use an emergency tax code. For 2025/26, the emergency code is 1257L on a non-cumulative basis (shown as 1257L W1 or 1257L M1). This means each pay period is treated independently rather than cumulatively, which can result in over- or under-deduction of tax.

Once HMRC processes your new starter notification (submitted via your first FPS), they will issue the correct tax code. This typically takes 4-6 weeks.

Tax Code Errors

Tax codes are not always correct. Common errors include:

• Previous employer's benefits still included after changing jobs
• Estimated untaxed income that no longer applies
• Incorrect coding out of previous year's underpayment
• Scottish/Welsh rate applied to someone who has moved

You can check and update your tax code through your HMRC Personal Tax Account. If your code is wrong, contact HMRC immediately. An incorrect tax code throughout the year creates a balancing payment or refund at year end through Self Assessment.

P45, P60, and P11D: The Key PAYE Documents

P45: When You Leave a Job

A P45 is issued when an employee leaves. It shows:

• Your tax code
• Total pay in the tax year up to the leaving date
• Total tax deducted up to the leaving date
• Your National Insurance number

You give Part 2 and 3 of the P45 to your new employer (or keep it if not starting a new job immediately). Part 1 goes to HMRC. Part 1A is yours to keep.

For directors leaving one company to start another, the P45 ensures the new company applies the correct cumulative tax position. Without it, you start on an emergency code and risk over-taxation until HMRC corrects it.

P60: Annual Summary

Every employee (including directors) still employed on 5 April receives a P60. It summarises:

• Total pay for the tax year
• Total Income Tax deducted
• Total NICs deducted
• Your tax code at year end

You need the P60 to complete your Self Assessment return. It confirms the salary and PAYE tax figures that go in the employment section. Your company must issue P60s by 31 May following the tax year end.

P11D: Benefits in Kind

If you receive benefits through your company that are not processed through payroll (company car, private medical insurance, interest-free loans above £10,000), these are reported on form P11D. The P11D is submitted to HMRC by 6 July and a copy given to the employee.

From April 2026, all benefits in kind must be payrolled (reported and taxed through PAYE in real time). P11D reporting for most benefits will become obsolete. However, for the 2025/26 tax year, P11Ds are still required for non-payrolled benefits.

Benefits reported on a P11D are typically coded into the following year's tax code, so the tax is collected through PAYE rather than Self Assessment. The P11D itself does not create a Self Assessment liability, but the underlying benefit value must still be reported on your tax return if you file one.

For a comprehensive explanation of P11D obligations for directors, see our P11D guide for limited companies.

National Insurance: Class 1, Class 2, and Class 4

National Insurance Contributions are one of the most misunderstood aspects of UK taxation. Different classes apply depending on how you earn your income, and directors face specific rules that differ from ordinary employees.

NIC Classes Comparison

Class	Who Pays	On What	Rate (2025/26)	Threshold
Class 1 (Employee)	Employees and directors on salary	Earnings from employment	8% (£12,570-£50,270), 2% above	Primary Threshold: £12,570/year
Class 1 (Employer)	The employing company	Employee earnings	15%	Secondary Threshold: £5,000/year
Class 1A	The employing company	Benefits in kind	15%	On full value of benefit
Class 2	Self-employed individuals	Flat rate	£3.45/week	Small Profits Threshold: £6,725/year
Class 4	Self-employed individuals	Profits from self-employment	6% (£12,570-£50,270), 2% above	Lower Profits Limit: £12,570/year

Directors and Class 1 NICs: The Annual Earnings Period

Ordinary employees have NICs calculated on each pay period independently. Directors are different. HMRC applies an annual earnings period to directors, meaning NICs are calculated on cumulative annual earnings rather than per pay period.

This matters because directors often pay themselves irregularly. A director might take no salary for six months then draw £12,570 in a lump sum. Under the annual earnings period method, this is treated the same as if they drew £1,047.50 per month throughout the year. The NICs liability is identical.

There is an alternative: the pro-rata method, where NICs are calculated on each pay period as if the director were a regular employee, with a year-end reconciliation. Most payroll software defaults to the annual earnings period for directors. If your director's salary is consistent each month, both methods produce the same result.

For a full explanation of how NIC rules apply specifically to directors, read our National Insurance for Directors guide.

Why Directors Usually Avoid Class 2 and Class 4

Class 2 and Class 4 NICs apply to self-employed individuals. Directors of limited companies are not self-employed. They are employees of their company. Therefore:

• Directors pay Class 1 NICs on their salary (through PAYE)
• Directors do not pay Class 2 or Class 4 NICs on dividends
• Directors who are also self-employed (e.g., freelancing outside the company) pay Class 2/4 on that separate self-employment income

This distinction is one of the main tax advantages of operating through a limited company rather than as a sole trader. Dividends are subject to Income Tax only, not National Insurance, which saves a combined 8% to 2% depending on the rate band.

Registering for Self Assessment

If you need to file a Self Assessment return and have never done so before, you must register with HMRC. The process differs depending on your circumstances.

How to Register

For directors and employed individuals:

1. Register online at gov.uk/register-for-self-assessment
2. Select "You are not self-employed" and then the relevant reason (e.g., "company director" or "income from dividends")
3. Provide your National Insurance number, company UTR (if applicable), and personal details
4. HMRC will send your UTR (Unique Taxpayer Reference) by post within 10 working days

For self-employed individuals:

1. Register for Self Assessment and Class 2 NICs simultaneously
2. This can be done through the gov.uk registration process
3. You will receive a UTR and be enrolled for Class 2 NICs

Registration deadline: You must register by 5 October following the end of the tax year in which you first need to file. For the 2025/26 tax year, this means registering by 5 October 2026 at the latest.

Your Unique Taxpayer Reference (UTR)

The UTR is a 10-digit number assigned to you personally. It remains the same for life, regardless of how many times you change jobs, start companies, or move house. You need it to:

• File your Self Assessment return
• Make tax payments to HMRC
• Contact HMRC about your Self Assessment affairs
• Set up your HMRC online account (if not already done)

Do not confuse your personal UTR with your company's UTR. They are separate numbers. Your company has its own UTR for Corporation Tax. Your personal UTR is for your individual Self Assessment.

If you lose your UTR, you can find it on previous tax returns, previous correspondence from HMRC, or by calling the Self Assessment helpline (0300 200 3310).

Self Assessment Deadlines for 2025/26

Deadline	Date	What's Due
End of tax year	5 April 2026	2025/26 tax year ends
Registration for new filers	5 October 2026	Register for SA if first time filing
Paper return deadline	31 October 2026	File paper SA100
Online return deadline	31 January 2027	File online SA100
Tax payment deadline	31 January 2027	Pay balance owed for 2025/26
First payment on account	31 January 2027	50% of estimated 2026/27 liability
Second payment on account	31 July 2027	Remaining 50% of estimated 2026/27 liability
Amend your return	31 January 2028	Last date to correct errors

The critical date for most directors is 31 January 2027. This is when the online return must be filed AND any tax owed must be paid. Missing either triggers separate penalties.

Filing Early vs. Filing Late

There is no advantage to waiting until January. You can file your 2025/26 return as soon as 6 April 2026. Filing early does not mean paying early. The payment deadline remains 31 January regardless of when you file.

Benefits of filing early:

• You know your tax liability months in advance
• No January deadline stress
• More time to plan payment
• HMRC processes refunds sooner
• If you owe less than £3,000 and file by 30 December, HMRC can code the debt into next year's PAYE

Penalties for Late Filing and Late Payment

HMRC's penalty structure is severe and escalates over time. Understanding it is essential to avoiding unnecessary costs.

Late Filing Penalties

How Late	Penalty
1 day late	£100 (even if no tax is owed)
3 months late	£10 per day for up to 90 days (max £900)
6 months late	£300 or 5% of the tax due (whichever is greater)
12 months late	£300 or 5% of the tax due (whichever is greater), or up to 100% of tax due in serious cases

The maximum penalty for filing over 12 months late is £1,600 plus up to 100% of the tax due. In practice, a director who owes £5,000 in tax and files 12 months late faces: £100 + £900 + £300 + £300 = £1,600 in fixed penalties, plus potential percentage penalties on the tax owed.

Late Payment Penalties

How Late	Penalty
30 days late	5% of the outstanding tax
6 months late	Additional 5% of tax still unpaid
12 months late	Further 5% of tax still unpaid

HMRC also charges interest on late payments. The late payment interest rate as of 2025/26 is set quarterly and has been running above 7% per annum. This compounds daily.

PAYE Late Penalties

Employers face separate penalties for late RTI submissions and late PAYE payments:

Offence	Penalty
Late FPS submission (1-3 employees)	£100 per month
Late FPS submission (4-9 employees)	£200 per month
Late FPS submission (10-49 employees)	£300 per month
Late PAYE payment	1%-4% of amount paid late (escalating over the year)
Late P11D submission	£300 per form, per employee

One-person companies with a sole director typically face the £100 per month penalty for late RTI submissions. HMRC grants a tolerance of one late submission per tax year before penalties apply.

The SA100 Tax Return: Section by Section

The Self Assessment tax return (form SA100) has multiple sections. Not all are relevant to every taxpayer. Directors typically complete:

Core Pages

Personal details (SA100 main form)

• Name, address, National Insurance number, UTR
• Marital status (relevant for Married Couple's Allowance for those born before 6 April 1935)
• Student loan repayment status
• Blind Person's Allowance claim

Employment income (SA102)

• Employer name and PAYE reference
• Pay from each employment (from your P60)
• Tax deducted (from your P60)
• Benefits from P11D
• Expenses claimed against employment income

Dividends and investment income (SA100, boxes 4-7)

• UK dividends received
• Foreign dividends
• Interest from banks and building societies
• Other investment income

Additional Pages (if applicable)

Supplementary Page	Form	When Needed
Self-employment	SA103S (short) or SA103F (full)	If you also freelance or trade as a sole trader
UK property income	SA105	Rental income from UK property
Foreign income	SA106	Income from overseas sources
Capital gains	SA108	Gains above the £3,000 annual exemption
Residence and remittance	SA109	Non-UK domiciled or non-resident

Key Boxes for Directors

The most important entries for a typical director taking salary and dividends:

• Employment income: Enter your P60 figures. If you have multiple directorships, complete a separate SA102 for each.
• Dividends: Enter total UK dividends received in the year. The £500 dividend allowance is applied automatically. You do not need to subtract it.
• Student loan: Tick the relevant box if you have an outstanding student loan. Repayments on dividend income above the threshold are calculated automatically.
• Pension contributions: Enter any personal pension contributions made (the company's employer contributions go on the CT600, not your personal return).

Payments on Account

Payments on account are advance payments towards next year's tax bill. They are required if:

• Your Self Assessment liability exceeds £1,000, AND
• Less than 80% of your total tax was collected at source (through PAYE)

How Payments on Account Work

Each payment on account is 50% of the previous year's Self Assessment liability. They are due on:

• 31 January during the tax year (first payment on account)
• 31 July after the tax year (second payment on account)

A balancing payment (or refund) is made on the following 31 January when the actual liability is known.

Worked Example: Payments on Account

2024/25 tax year:

• Salary: £12,570 (no PAYE tax due)
• Dividends: £50,000
• Self Assessment liability: £7,843.75

2025/26 payments on account (based on 2024/25 liability):

• 31 January 2026: £3,921.88 (first payment on account)
• 31 July 2026: £3,921.88 (second payment on account)
• Total paid on account: £7,843.76

2025/26 actual liability turns out to be £8,500:

• Balancing payment due 31 January 2027: £8,500 - £7,843.76 = £656.24
• Plus first payment on account for 2026/27: £4,250 (50% of £8,500)
• Total due 31 January 2027: £4,906.24

This is why the January payment can feel enormous. You are paying the balance from last year PLUS half of next year's estimated bill.

Reducing Payments on Account

If you expect your income to drop, you can apply to reduce your payments on account through your HMRC online account. Be accurate. If you reduce them too much and the actual liability is higher, HMRC charges interest on the shortfall from the original due date.

Worked Examples: Three Director Scenarios

Example 1: Solo Director, Salary and Dividends Only

Sarah is the sole director of a digital marketing consultancy. In 2025/26, she takes:

• Salary: £12,570
• Dividends: £35,000
• No other income

PAYE position:

• Tax code: 1257L
• Income Tax on salary: £0 (fully covered by personal allowance)
• Employee NICs: £0 (salary at personal allowance = Primary Threshold)
• Employer NICs: (£12,570 - £5,000) x 15% = £1,135.50 (paid by the company)

Self Assessment position:

• Total income: £12,570 + £35,000 = £47,570
• Personal allowance: already used by salary through PAYE
• Dividend tax:
  • First £500: 0% = £0
  • Remaining £34,500 at basic rate (8.75%): £3,018.75
• Total SA liability: £3,018.75
• PAYE already deducted: £0
• Amount to pay via Self Assessment: £3,018.75

Payments on account required? Yes. The liability exceeds £1,000 and more than 80% was uncollected at source.

• Each payment on account: £1,509.38

Sarah should budget approximately £3,019 for 31 January 2027, plus two payments on account of £1,509 each for the following year if her income remains similar.

Example 2: Director with Employment and Dividends Crossing Higher Rate

James runs an IT consultancy through his limited company. He also has a part-time employed role at another firm. In 2025/26:

• Salary from own company: £12,570
• Salary from employer: £35,000
• Dividends from own company: £25,000
• Bank interest: £800

PAYE position:

• Personal allowance allocated to his own company payroll (tax code 1257L)
• Own company salary: £0 tax deducted
• Employer salary tax code: BR (basic rate, no allowance). Tax deducted: £35,000 x 20% = £7,000
• NICs on employer salary: standard Class 1 employee contributions

Self Assessment position:

• Total income: £12,570 + £35,000 + £25,000 + £800 = £73,370
• Personal allowance: £12,570
• Taxable income: £60,800
• Non-dividend taxable income: £35,000 (employer salary, already taxed)
• Remaining basic rate band for dividends: £50,270 - £35,000 = £15,270
• Interest: £800. Covered by £500 Personal Savings Allowance (basic rate taxpayers get £1,000, but James is higher rate so gets £500). Wait: James is higher rate. Higher rate taxpayers get £500 PSA. £800 - £500 = £300 taxable at 40% = £120.
• Dividend tax:
  • First £500: 0%
  • Next £14,770 at basic rate (8.75%): £1,292.38
  • Remaining £9,730 at higher rate (33.75%): £3,283.88
• Total tax due: £7,000 (employment) + £120 (interest) + £0 + £1,292.38 + £3,283.88 = £11,696.26
• Less PAYE already deducted: £7,000
• Self Assessment balance: £4,696.26

James needs to pay £4,696.26 through Self Assessment and will face payments on account for the following year. He should also check his tax codes are correct across both employments, as an error here could create a large underpayment.

Example 3: Director Approaching the Personal Allowance Taper

Priya has a successful software company and is considering her extraction strategy for 2025/26:

• Salary: £12,570
• Dividends: £95,000
• Total income: £107,570

PAYE position:

• Salary fully covered by personal allowance. £0 tax deducted.

Self Assessment position:

• Total income: £107,570
• Personal allowance reduction: Income above £100,000 = £7,570. Allowance reduced by £7,570 / 2 = £3,785. Remaining allowance: £12,570 - £3,785 = £8,785.
• Taxable income: £107,570 - £8,785 = £98,785
• Non-dividend taxable (salary above reduced allowance): £12,570 - £8,785 = £3,785
  • Tax on this at 20%: £757
• Dividend tax:
  • First £500: 0%
  • Basic rate band remaining: £50,270 - £3,785 = £46,485. Of that, dividends filling this: £46,485 at 8.75% = £4,067.44
  • Higher rate: £95,000 - £500 - £46,485 = £48,015 at 33.75% = £16,205.06
• Total SA liability: £757 + £4,067.44 + £16,205.06 = £21,029.50

This example illustrates the cost of the personal allowance taper. By earning £7,570 above £100,000, Priya loses £3,785 of her allowance, creating an effective marginal rate of approximately 60% on that income band. Directors approaching the £100,000 threshold should consider whether additional pension contributions or deferred dividends could avoid this trap.

To understand the optimal salary/dividend split for your circumstances, see our Director's Salary 2025/26 guide.

PAYE Settlement Agreements

A PAYE Settlement Agreement (PSA) allows an employer to pay the tax and NICs on certain benefits and expenses on behalf of employees. This is typically used for:

• Staff entertainment and social events
• Gifts and incentive awards
• Shared expenses that are difficult to allocate individually
• Minor or irregular benefits

To set up a PSA, you must apply to HMRC before the start of the tax year (or before 6 July after the tax year for existing agreements). Once agreed, the employer pays the tax and Class 1B NICs by 22 October following the tax year.

For most one-person companies, PSAs are unnecessary. They become relevant when you employ additional staff and provide group benefits that would be impractical to process individually through payroll.

Making Tax Digital and the Future of PAYE and Self Assessment

Making Tax Digital (MTD) for Income Tax Self Assessment launches on 6 April 2026 for self-employed individuals and landlords with income above £50,000. This requires quarterly digital submissions using compatible software.

For directors of limited companies, MTD for Income Tax does not directly apply to your company salary (which is already reported quarterly through RTI). However, if you also have self-employment or property income that puts you above the threshold, you will need to comply with MTD for those income streams.

The direction of travel is clear: HMRC is moving towards real-time digital tax reporting across all income types. Future phases of MTD are expected to bring more taxpayers into scope, including those with lower income thresholds.

For now, directors continue to use:

• RTI (Real Time Information) for PAYE salary reporting
• Annual Self Assessment for dividends, property, and other income

Our Making Tax Digital guide covers the latest requirements and timeline.

Special Rules for Directors: What You Must Know

Directors are subject to several rules that differ from ordinary employees:

Annual Earnings Period for NICs

As covered above, directors' NICs are calculated on an annual basis rather than per pay period. This prevents directors from structuring multiple small payments to stay below per-period thresholds. The annual calculation ensures the same NICs are due regardless of payment frequency.

Benefits in Kind Reporting

Directors are often the most common recipients of company benefits: cars, medical insurance, loans, and accommodation. All benefits must be reported on P11D (or through payrolled benefits from April 2026). The tax and Class 1A NICs on these benefits can be substantial.

Directors' Loan Account (DLA)

If you withdraw money from the company that is not salary or dividends, it creates a director's loan. If the loan exceeds £10,000 at any point during the tax year, it is treated as a benefit in kind. The company must report it on form P11D and pay Class 1A NICs. You pay tax on the official rate of interest (currently 2.25%) applied to the loan balance.

If the loan is not repaid within nine months of the company's year end, the company pays Section 455 tax at 33.75% (refundable when repaid).

Multiple Directorships

If you hold directorships at multiple companies, each company operates PAYE independently. You should ensure your personal allowance is allocated to only one employment (usually the highest-paying one). Other employments should use tax code BR or D0.

On Self Assessment, you report each employment on a separate SA102 supplementary page. The total tax from all sources is calculated, PAYE already deducted is credited, and the balance is paid through Self Assessment.

For further detail on managing tax across multiple roles, see our guide to multiple directorships and tax implications.

How to Pay Your Self Assessment Bill

HMRC accepts several payment methods, each with different processing times:

Method	Processing Time	Notes
Online banking (Faster Payments)	Same or next working day	Use your UTR as the payment reference
CHAPS	Same day	Bank may charge a fee
Bacs	3 working days	Set up in advance
Direct Debit	3-5 working days	Set up through HMRC online account
Debit card online	Same day	Via HMRC's online payment portal
Credit card	Not accepted	HMRC stopped accepting credit cards in January 2018
Cheque by post	Allow 10+ working days	Include the payslip from your statement
Budget Payment Plan	Ongoing	Set up weekly or monthly payments year-round

The most reliable method is online banking via Faster Payments. Use your 10-digit UTR as the payment reference, and pay to HMRC's Self Assessment bank account (details on gov.uk). Payments made on the deadline day (31 January) via Faster Payments are accepted as on time.

Time to Pay Arrangements

If you cannot pay your full bill by the deadline, contact HMRC before the due date to set up a Time to Pay arrangement. You can do this online if:

• You owe £30,000 or less
• You are within 60 days of the payment deadline
• You have no other outstanding HMRC debts
• You can pay within 12 months

Interest still accrues on the outstanding balance, but late payment penalties are suspended while a Time to Pay arrangement is in place.

Common Mistakes Directors Make with PAYE and Self Assessment

Mistake 1: Not Registering for Self Assessment When Taking Dividends

Many first-time directors assume dividends are "taken care of" because they come from the company. Dividends are not taxed at source. You must register for Self Assessment, file a return, and pay the dividend tax yourself. HMRC will eventually catch up and impose penalties for failing to notify.

Mistake 2: Forgetting Payments on Account

After your first year of Self Assessment, the January payment often feels unexpectedly large because it includes the balancing payment for the previous year PLUS the first payment on account for the coming year. Budget for 150% of your expected liability in that first January.

Mistake 3: Running PAYE Incorrectly for Directors

Using monthly NIC calculation instead of the annual earnings period method can result in over- or under-collection of NICs. Most payroll software handles this correctly if you flag the individual as a director, but manual calculations must use the annual method.

Mistake 4: Missing the Employment Allowance

Companies with employer NIC liability can claim the Employment Allowance of up to £10,500 per year (2025/26). However, it is not available to single-director companies where the director is the only employee. If you employ at least one other person (including a spouse), the allowance becomes available.

Mistake 5: Not Claiming Allowable Expenses Through Self Assessment

If you incur business expenses that your company does not reimburse (e.g., working from home, professional subscriptions, use of personal vehicle for business), you can claim tax relief through Self Assessment. Many directors leave money on the table by not claiming these deductions.

Frequently Asked Questions

Do I need both PAYE and Self Assessment as a limited company director?

In most cases, yes. PAYE handles the tax and NICs on your salary, processed automatically through your company's payroll. Self Assessment handles the tax on dividends, which are not taxed at source. If you take any dividends at all, you need Self Assessment. The only directors who avoid it are those taking salary only, under £100,000, with no other untaxed income.

Can I avoid Self Assessment by only taking a salary from my company?

Technically, yes. If your only income is PAYE salary below £100,000, you have no dividends, no rental income, no capital gains, and HMRC has not issued you a notice to file, you do not need to file a Self Assessment return. However, most directors take dividends because they are more tax-efficient than salary above the personal allowance, so avoiding Self Assessment usually means leaving money on the table.

What happens if I miss the 31 January Self Assessment deadline?

You face an immediate £100 late filing penalty, even if you owe no tax. After three months, daily penalties of £10 per day begin (up to 90 days). After six months, a further penalty of £300 or 5% of the tax due (whichever is greater) is charged. After twelve months, another £300 or 5% penalty applies. Late payment attracts separate 5% surcharges at 30 days, 6 months, and 12 months, plus daily interest. A director owing £5,000 and filing a year late could face over £3,000 in combined penalties and interest.

How do I know which income goes through PAYE and which goes through Self Assessment?

Income from employment (salary, wages, bonuses) goes through PAYE. Your employer deducts tax before paying you. Everything else, including dividends, rental income, freelance income, investment gains, and foreign income, goes through Self Assessment. On your tax return, you report all income (including PAYE income) and the tax already deducted through PAYE is credited against your total liability.

What is a UTR number and how do I get one?

A Unique Taxpayer Reference (UTR) is a 10-digit number assigned to you by HMRC when you register for Self Assessment. It is your personal identifier for all Self Assessment dealings. Register online at gov.uk/register-for-self-assessment. HMRC will post your UTR within 10 working days. Do not confuse it with your company's UTR, which is used for Corporation Tax.

Do directors pay National Insurance on dividends?

No. Dividends are subject to Income Tax only, not National Insurance. This is the primary reason most directors use a salary-plus-dividends strategy rather than taking all income as salary. Salary attracts both Income Tax and Class 1 NICs (employee and employer). Dividends attract only dividend tax at 8.75%, 33.75%, or 39.35% depending on the rate band. The NIC saving is the main tax advantage of the limited company structure.

What are payments on account and can I reduce them?

Payments on account are advance payments towards your next year's tax bill. Each payment is 50% of the previous year's Self Assessment liability. The first is due on 31 January (during the tax year), the second on 31 July (after the tax year). You can apply to reduce them through your HMRC online account if you expect lower income, but be careful: if you reduce too much and the actual liability is higher, HMRC charges interest on the shortfall from the original due date.

Can HMRC collect my Self Assessment tax through my PAYE code?

Yes, through a process called "coding out." If you owe less than £3,000 from Self Assessment and file your return by 30 December (online), HMRC may adjust your PAYE tax code for the following year to collect the underpayment. This spreads the payment across the year rather than requiring a lump sum. You will see a reduced tax code or a K code on your payslip. You cannot opt into this; HMRC decides whether to apply it.

What is the difference between a P45, P60, and P11D?

A P45 is issued when you leave an employment. It shows your pay and tax deducted up to the leaving date, and you give it to your next employer. A P60 is an annual summary issued to every employee still employed on 5 April, showing total pay and tax for the year. You need it for Self Assessment. A P11D reports benefits in kind (company car, medical insurance, loans) that were not taxed through payroll. From April 2026, most benefits must be payrolled, making P11Ds largely obsolete.

Should I file my Self Assessment return early or wait until January?

File early. There is no advantage to waiting. The payment deadline remains 31 January regardless of when you file. Filing early means you know your liability sooner, you can plan the payment, you avoid January deadline stress, and if you are due a refund, HMRC processes it faster. If you file by 30 December and owe less than £3,000, HMRC can collect it through your PAYE code instead of requiring a lump sum payment.